What are Debentures?

Debentures are long-term credit securities issued by publicly traded companies, representing loans taken out by them, each security giving the debenture holder identical credit rights against companies, established in the issue deed.The objective of companies in issuing debentures is to obtain long-term funds to finance investment projects or to lengthen the debt profile.To issue a debenture, a company must have an issue deed, which describes all the rights conferred by the bonds, their guarantees and other clauses and conditions of the issue and their characteristics.

The fundraising by the company through debentures generates an accounting entry in its assets (cash equivalents) and another in its liabilities in accounting.In this way, corporations have at their disposal the necessary facilities to raise funds from the public, at long terms and at lower interest rates, with monetary restatement and fixed-term redemptions, according to their needs to better adjust their cash flow. .

Thus, once the need to raise financial resources from third parties has been identified, for the realization of investments and for the fulfillment of previously assumed obligations, the company’s management will take to the Board of Directors or the proposed General Meeting that a public loan is contracted, normally long term, through the issuance of debentures.

Once the issuance of debentures has been approved, it is up to the management of the company to perform all the acts necessary for the realization of the loan, by placing the bonds with the public, in order to satisfy its resource needs.Debenture holders have legal protection through the deed of issue and the trustee.

The issue deed is a legal document that specifies the conditions under which the debenture was issued, the rights of the owners and the obligations of the issuer. It is an extensive document containing standardized, restrictive and warranty-related clauses. The deed contains, among others, the following conditions: amount of the issue; number of securities and the nominal unit value; form; convertibility conditions; species; date of issue; due date; remuneration; interest; premium; optional acquisition and / or optional early redemption clause; amortization conditions.

How to Account for Debentures

They constitute an obligation of the legal entity to third parties and, therefore, they need to be classified according to the expected term for their maturity, in Current Liabilities or in Non-Current Liabilities.

Let us admit that on June 1, 2017, a certain company issued and traded debentures convertible into shares, with a nominal value of R $ 1,000,000.00, maturing in 60 months.

D – Banks (Current Assets – Cash) R $ 1,000,000.00
C – Convertible Debentures (Current Liabilities – Accounts Payable) R $ 200,000.00
C – Convertible Debentures (Non-Current Liabilities – Accounts Payable) R $ 800,000, 00

R $ 1,000,000.00 / 60 = R $ 16,666.67
Current: R $ 16,666.67 * 12 months = R $ 200,000.00
Non-current: R $ 16,666.67 * 48 months = R $ 800,000.00

During the term, the debentures issued must be reclassified to Current Liabilities, so that they count in this group when they are already due in the short term.

The financial institution contracted to place these securities on the market charged R $ 5,000.00 for this service.

D – Expenses with Issuance of Debentures to be Appropriated (Current Assets) R $ 1,000.00
(R $ 5,000.00 / 60 months * 12 months = 1,000.00)
D – Expenses with the Issuance of Debentures to be Appropriated (Non-Current Assets) R $ 4,000.00
(R $ 5,000.00 / 60 months * 48 months = 4,000.00)
C – Banks (Current Assets – Cash) R $ 5,000.00

By converting debentures into shares

If the debentures are converted into shares, the entry is as follows:

D – Convertible Debentures (Current Liabilities)
C – Share Capital (Shareholders’ Equity)

For the redemption of non-convertible debentures

Unconverted debentures are redeemed by the issuing company:

D – Convertible Debentures (Current Liabilities)
C – Movement Account Banks (Current Assets)

Legal base:

  • Arts. 52 to 74 of Law No. 6,404 / 1976, with the changes introduced by Law No. 9,457 / 1997 and Law No. 10,303 / 2001.

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